Struggling with debt can be challenging and very stressful. Finding a way out of it can be even more difficult. For many Canadians, the first thought that comes to mind is bankruptcy, a term fraught with images of losing everything you own. While bankruptcy is one debt relief option, it is not the only one available and is not the even the most popular option in dealing with unmanageable debt.
In this blog, we will look at how to get out of debt without bankruptcy and the pros and cons of these options.
Debt Repayment Methods
There are some DIY debt solutions available if you have fallen behind on payments and are not struggling to make minimum payments or can tighten your budget.
The first step is to make a list of all your debt, including who you owe it to, how much you owe, the interest rate, and when it is due. This will allow you to get a full overview of your total debt and help you prepare for the next step.
There are two main debt repayment methods to consider: the avalanche method and the snowball method. Both have the same goal, paying off all of your debts, but their approaches are vastly different.
Avalanche Method
In the avalanche method, you begin with the debt with the highest interest rate, moving down to the lowest interest rate as you go. This will allow you to pay off high-interest credit cards and payday loans first, eliminating the debt adding the most interest every month first, freeing up resources to pay off the actual debt faster.
Snowball Method
On the other hand, the snowball method begins with the smallest amount of owing, building up to the largest balance. The psychology behind this is that paying off some debts will motivate you to continue down the path to becoming debt-free. A side effect of this approach is that you also reduce the number of payments you have to keep track of each month, making everything feel less overwhelming and making managing your bills easier.
Regardless of which of these two methods you choose, budgeting is key to ensuring you have a strategy. One critical factor is to stop using credit cards and lines of credit. After all, you want to reduce your debt, not add to it. One way to keep better control is to pay for expenses in cash because actually handing over money makes you far more conscious of your spending habits than just swiping a card.
Debt Consolidation Loan
A debt consolidation loan is a bank loan that allows you to pay off various smaller debts to help consolidate all or most of your debts. This will enable you to combine several payments into one lower monthly payment, often at a lower interest rate and spread over a longer period. It is important to note that this approach does not reduce your debt but only makes it easier to manage and can potentially reduce the overall load of interest on your debt.
A potential downside is that you must qualify for a debt consolidation loan. Depending on your financial situation and credit rating, some stipulations might be imposed by your financial institution. Generally, you will need to have a reasonable credit rating and enough income for the monthly payments. If your credit rating is challenged, your bank may ask you to pledge some assets, such as your car or house, as collateral should you default on the payments.
While a secured debt consolidation loan may be easier to obtain, it also has the risk of you losing whichever assets you pledged if you default on the consolidation loan payments. it.
Consumer Proposal
A Consumer Proposal is a federally regulated, legally binding debt settlement process. It provides an alternative to declaring personal bankruptcy and is exclusively administered by a Licensed Insolvency Trustee (LIT). It is an attractive option if you cannot pay your debt in full anymore but want to avoid bankruptcy.
In a consumer proposal, the Licensed Insolvency Trustee will carefully review your financial situation to determine if a consumer proposal is the right option for you. If it isso, they will calculate a monthly proposal payment you can afford, an agreed-upon settlement amount that could be up to 80% less than the total of your unsecured debt, paid over a period of up to five years and they will prepare the proposal documents for you to sign. your creditors. If the the creditors agree to the proposal, you will make your monthly payments to your LIT and at the end of the period, the remainder of your unsecured debt will be discharged (written off).
Once the proposal is filed, all legal actions against you, such as wage garnishments or intrusive calls from collection agencies, are stopped immediately, and no more interest will be charged on any of the debt included in the proposal.
A consumer proposal covers most unsecured debts, which include various debt types not secured by assets like a house or car. Typically, the following can be included in a consumer proposal:
- Credit card debt
- Personal loans, including lines of credit, consolidation, or renovation loans, provided no assets secure the debt.
- Payday loans
- Student loans, if you ceased to be a student at least seven years ago
- Even various types of tax debt, including amounts owed for personal income tax (including penalties and interest), HST/GST debts and even Covid related government debts.
Credit Counseling
Credit counselling, also known as a Debt Management Plan (DMP), is a repayment plan negotiated by a credit counsellor. They can negotiate a plan where you have to pay your debts in full but at a potentially lower interest rate, making it easier to keep track of your payments and reducing the interest load at least up to a point. Your counsellor can help you set up the monthly payment program and keep track of payments.
Unlike with a consumer proposal, a DMP is not legally binding on the creditors and not all creditors may participate in the repayment plan.
It is critical to note that a credit counselling program is not free but costs 10% of what you owe. So, if you plan to repay $11,000 of debt, you will have to pay a total of $12,100. Your credit counsellor also cannot negotiate any deals to pay back less than what you owe.
Be Debt Free, Talk to Chande Debt Solutions!
Choosing the right debt solution is critical to ensure it is the best solution for your situation. Remember, there’s no one-size-fits-all answer when it comes to managing debt. Each journey is unique, and finding the right path requires careful consideration and, often, professional guidance.
The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal debt relief and insolvency services. They can help you prepare by examining all debt relief options and devise a strategy to resolve your debts. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well-informed and don’t rush into any solutions. All of our consultations are free, without time limits.
Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.
